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D&O - 5 Common Misconceptions

Published: 09/12/14

D&O cover is essential for companies of all sizes and important protection for firms from potentially devastating claims. D&O is not as expensive as it’s often perceived to be, yet too few directors and owner-managers decide to take this cover.

Here we explain some of the common misconceptions about D&O.

1. D&O is only for those running public limited companies or in very large private businesses

Many directors automatically assume that D&O cover is only for multi-millionaire businessmen, such as Lord Alan Sugar or Donald Trump, who may be susceptible to potential liability quite frequently. But it is simply not the case.

In reality every director or officer is open to claims and claims can come from absolutely anywhere: customers, competitors, suppliers, employees, the company itself in the form of regulators, as well as governmental and law enforcement agencies.

Our best advice to clients is to consider D&O as just another form of standard catastrophe cover; something that we are all used to taking out as individuals to protect our personal assets.

2. We don’t need D&O cover because the directors are covered by their limited status

Many directors assume they are covered by their limited status, but this is not the case. Shareholders’ liability is limited, but that of directors and officers is not, even if an individual is both.

What we would say is that the liability is attached to the role, and a the director’s or officer’s own cash, home, pension pot, other assets and even their liberty is at stake should a claim occur.

3. It’s too expensive

We know that cost is an important factor, but it shouldn’t always come down to this. D&O can be as low as an additional £100, plus it’s the company, not the individual, that pays the modest premium. Generally, what in the grand scheme of things can be considered a modest premium increase provides invaluable protection. D&O cover is not as expensive as it is perceived to be and more importantly is always going to be cheaper than the possible alternative.

4. It’s too complex

As with all things, people are wary of what they don’t fully understand and might reject D&O, without fully realising the potential benefits.

In terms of underwriting, D&O has been hugely simplified from where it was even 10 years ago. Historically underwriters wanted two or three years of financial information and naturally some companies did not want to disclose this. However, things have changed and for anything less than a public limited company, insurers generally only ask for financial information such as turnover and confirmation that companies are solvent. It’s often as simple as that.

Common D&O scenarios where cover comes into action:

  • Employment practices, HR issues
  • Shareholder actions
  • Reporting errors
  • Inadequate or inaccurate disclosure (e.g. in company accounts)
  • Misrepresentation in a prospectus
  • Decisions exceeding the authority granted to a company officer
  • Failure to comply with regulations or laws

What's not covered? A D&O policy does not cover fraudulent, criminal or intentional non-compliant acts. However, innocent directors remain fully covered if they are co-defendants, even if the acts of their colleagues were intentional or fraudulent.

5. It’s not a real risk

A common assumption by many directors is that in the event of an incident involving directors, the company will pay their defence costs should an action be taken against them. This may be true in some circumstances, but there are many situations where the company may be unwilling, unable or not permitted to protect their directors and officers in this way.

As your insurance broker it is important for us to ensure that you are fully aware about the benefits of Directors and Officers cover, which is now considered to be a mass market product and not a niche cover. Call Tony Cracroft on 0845 371 1452 or email tonycracroft@flintinsurance.co.uk to discuss how D&O cover can benefit you.

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